Weekly Investment Update (11/25/2020)
As a follow-up to our webinar following the election, we will be publishing a note next week to update views in light of recent developments, including President-elect Biden’s cabinet selections.
Gold and Real Yields Decline Following Vaccine Announcements and Political Clarity
Gold has fallen nearly 13% after reaching an all-time high of $2,075 per ounce during the month of August. Recall that gold truly began its ascent in the second half of 2018, following tariff implementation by President Trump, which increased global uncertainty and created sharply uneven global growth expectations.
Global uncertainty has declined markedly with the U.S. election in the rearview mirror, the transition of political power in progress, and multiple vaccines showing high efficacy in Phase 3 trials. Impressive vaccine efficacy has allowed markets to price in higher growth expectations and push nominal yields higher. With a reversal in growth expectations and a drop in uncertainty, investors have sold gold ETF holdings with urgency; the top four gold ETFs have seen a two-standard-deviation outflow since September when measured on a six-month rolling basis over the past 10 years.
Nonetheless, given the Fed’s desire to maintain accommodative financial conditions until a durable recovery has taken hold, we expect real bond yields (nominal yields accounting for inflation expectations) to fall further in the near term. Given the inverse relationship between gold prices and real yields, we see potential for new highs in gold during the same time frame.
However, over the longer term, as inflation expectations stabilize at a higher level and nominal yields move higher to account for a more predictable path of economic activity, real yields are likely to move higher as well, which could limit the precious metal’s upside.
Post-Election Equity Sector Rotation Similar to 2016 Amid Fundamental Differences
Following Donald Trump’s election on November 8, 2016, U.S. regional banks, small caps, financials, industrials, and materials all outperformed the S&P 500 index into year-end. These highly cyclical sectors rallied impressively as investors increased the probability that deregulation, higher growth, and higher interest rates would occur in the near term. On the other hand, technology, consumer discretionary, utilities, and consumer staples underperformed the S&P 500 index as investors favored sectors more directly correlated to GDP growth potential. Impressively, despite differing political agendas, we are seeing identical sector performance unfold in the aftermath of this year’s presidential election.
While vaccine data has surely impacted sentiment, it is crucial to note that the inflationary backdrop in 2016 was markedly different than what we are currently experiencing in 2020. In 2016, inflation and inflation expectations had been trending higher throughout the year, which provided a key foundation for durable cyclical sector outperformance. In 2020, the disinflationary impact related to COVID-19 has far outweighed the rise in inflation expectations engineered by the Fed’s asset purchase programs. Only when we see a more durable increase in inflation and inflation expectations are we likely to see these highly cyclical sectors poised for long-term outperformance.
As such, our portfolio teams and strategy teams continue to monitor and model the shape of the economic recovery in a post-vaccine world. Given our long-term investment horizon, portfolio managers have begun to adjust positioning at the margin in order to account for businesses that will benefit from an increase in activity after a vaccine, though we believe it is too soon to position portfolios for a wholesale shift into the sectors that have been affected more adversely by COVID-19.
Thanksgiving Travel Provides a Boost to Air Traffic; Broader Mobility Is Declining But Still Well Above Spring Levels
While some mobility metrics have rolled over in recent weeks, we do not appear to be seeing anything similar to the spring plunge even as case counts reach record levels and hospitalization numbers surpass prior peaks. After reaching remarkably strong levels over the summer, U.S. driving and walking mobility metrics have been reverting toward their January 2020 levels, as winter’s seasonal effects could be influencing the amount of time spent outside the home. Motor gasoline demand has moved largely sideways since July and remains roughly 85% of its early-March pre-COVID peak. Though public transit mobility never fully recovered due to the continued work-from-home environment in most major metro areas, it has continued to weaken over the past two months after seeing modest gains throughout the summer.
However, the rate of mobility declines has slowed even as case counts continue to accelerate, indicating that some consumers may have adapted to life with COVID and the effects of specific mitigations and partial lockdowns have been less restrictive on overall mobility when compared to the total lockdowns of last spring. This provides one indicative point that the negative economic impact of increased restrictions should be far less than the spring.
Still, it is important to note that while monitoring mobility can be a helpful proxy for potential economic impact, it does not necessarily paint a perfectly complete picture. The U.S. has still experienced household consumption growth, booming home sales, and broader economic growth alongside the recent weakening mobility metrics.
In terms of air mobility, despite accelerating COVID case growth, holiday travel plans appear to be putting upward pressure on air travel. TSA throughput numbers surpassed one million on both the Friday and Sunday before Thanksgiving, reaching the highest level seen since early March. Even though current air travel levels are eight times greater than the spring lows, passengers are still down more than 50% from the 2020 peak. While the holiday travel has certainly provided a helpful boost to the airlines, looking over the full year, these are travel levels the industry has not seen since 1984, according to the airline trade group Airlines for America.
AstraZeneca and University of Oxford’s Vaccine Takes the Limelight This Week
AstraZeneca announced that its Phase 3 vaccine candidate has an efficacy rate of 90% when given as a half dose followed by a full dose at least one month later, and 62% when given as two full doses at least one month apart. Importantly, this dosage regimen suggests that a lower volume of vaccines could be needed if only a half dose is required for the first dose. AstraZeneca is going to seek Emergency Use Listing (EUL) from the WHO to accelerate its vaccine accessibility in low-income countries and is also preparing for regulatory submission for a conditional or early approval designation.
While the efficacy rates may be disappointing when compared to the Moderna and Pfizer and BioNTech vaccines on the surface, this is the first interim analysis and meets the FDA criteria of being greater than 50%. Note that the half dose/full dose regimen produced the same efficacy rate as Pfizer and BioNTech’s first interim analysis (the final efficacy rate was 95%). So, even if the efficacy rate is lower than Moderna’s and Pfizer and BioNTech’s, the vaccine may still prevent severe infections in most or all people who receive it, which would be enough to make a material impact on the pandemic.
Crucially, Astra’s vaccine also has favorable storage requirements. It can be stored, transported, and handled at 2 to 8 degrees Celsius, which is the standard refrigerator temperature, for at least six months and can be administered within existing healthcare settings. Astra also has high manufacturing capacity; the company intends to produce three billion doses of the vaccine in 2021 on a rolling basis. The U.S. has a contract to receive 300 million doses while the U.K., EU, and Brazil also have sizeable contracts.
In other vaccine news, the EU agreed to purchase up to 160 million doses of Moderna’s vaccine if approved by regulators. France’s President Macron said that the country’s vaccination program could begin to vaccinate the most vulnerable populations at the end of the year if one is approved by regulators. Spain’s prime minster said that the vaccination program will begin in January and start with vaccinating people in nursing homes; the goal is to have enough vaccines for the entire population by the middle of the year.
— Bessemer Investment Team
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